Divorce and Paying for College
How to pay for college (or other higher education) for the children after your divorce is a very important conversation for parents to have during the divorce.
Whatever you and your ex-spouse decide to do about paying for college, your intentions should be included in your separation agreement.
Generally, there are two funding concepts regarding college expenses:
- As part of the divorce, the parents agree not to make an obligation at that time. They conclude that each ex-spouse will pay what they choose to pay with no specific obligation when the time comes. Or,
- The parents decide to agree to contribute a certain amount and include the details in the separation agreement.
For information about college financial aid, please visit my post, “Divorce and College Financial Aid.”
Delaying the Decision Regarding College Funding
When there are relatively young children in the family, most parents have not yet focused on how to fund college. It’s not unusual for the separation agreement to indicate that parents will “figure it out” when the kids get older. Here are some things to consider and include in the agreement to have a clear record of the conversation during the divorce process.
- Both of you could commit to state your college funding intentions by the time the child(ren) enters high school. This way, you both can guide your child regarding his/her expectations about where to go to college and how it will be paid for.
- When the decision regarding college funding is deferred, it sometimes causes conflict later on when funding is discussed. This is usually because circumstances have changes significantly. There may be other children, marriages, or spending patterns that limit what a parent is now willing or able to pay.
- Sometimes parents make no obligation because one or both parents think college funding should be the child’s responsibility.
Funding College – Using a Benchmark for a Funding Goal
If parents are going to put a college obligation into the separation agreement, the most common method is to agree to use a specific benchmark or standard for the tuition amount. Parents often agree to set their contributions as a fraction of the tuition of a named New York State college, such as SUNY Brockport. As explained further below, choosing a college as a tuition benchmark does not obligate the child to choose that specific school. Here’s how this works.
- Let’s say fictional divorcing parents Bob and Sally decide that they will use SUNY Brockport’s in-state tuition to determine what each will contribute to their children’s college educations. They agree this financial support covers only tuition. Books, room and board, and other expenses are not included. John, their son, will graduate high school in June 2020, and Jane, their daughter, in June 2022.
- Bob and Sally determine what portion of the tuition each will pay and for how long:
- Perhaps they choose 50% each. Or, they base it on what each’s actual income is when the tuition is due. There are numerous choices here. Let’s say Bob and Sally choose 50% each.
- They also decide whether the amount when the child starts college stays the same for the duration or whether it’s recalculated each year based on any changes in the benchmark school tuition. Bob and Sally choose to keep their tuition contribution to be the same as the first year for each subsequent year.
- They also set a time limit of four (or more) years after high school graduation for how long the parents will pay each child’s tuition. Let’s say Bob and Sally choose a limit of four years.
- Fast-forward to 2019, and John is deciding on his college to start in the fall of 2020. SUNY Brockport’s annual tuition for 2020 is $12,000 (a made-up number). This means: (a) Bob and Sally will each pay $6,000 a year toward John’s tuition. (b) They will pay it every year through spring of 2024. (c) If the tuition at the college John chose is more than that of SUNY Brockport, there will need to be another plan to cover the difference. (d) If John needs a fifth or even sixth year to complete his education (in 2008 fewer than half of undergraduates completed their degree in 4 years), he will have to find another source of funding his tuition beyond year four.
- Fast-forward once more to 2021, and Jane is deciding on her college to start in the fall of 2022. SUNY Brockport’s annual tuition is now $14,000 (a made-up number). This means: (a) Bob and Sally each pay $7,000 a year toward’s Sally’s tuition. (b) They pay it every year through spring 2026. Items (c) and (d) above apply to Jane too.
|Total Paid by Each Parent
Other Points About “Benchmark” College Funding
- It’s prudent to limit this college obligation to the child(ren) to four or five years after high school graduation. This precludes being obligated to fund college when your kids are much older.
- The amount of money obligated can be used at any school. The SUNY school tuition is used only as a benchmark or a “value” amount and not intended to direct where a child attends school. If the child goes to Syracuse University or Harvard instead of SUNY Brockport, for instance, the funding obligation is still the same as documented in the separation agreement.
- Tuition is a considerable obligation. It’s why room and board are often not included in the obligation. Parental contributions toward expenses above the tuition obligation are voluntary. Other expenses may also be funded by the student’s wages, student loans, or other options.
Funding College – Setting a Specific Amount
Another way of making an obligation in the separation agreement is to set an annual amount for each parent. Each parent can decide the specifics of what they will pay. An example is agreeing to pay $3,000 per school (or calendar) year for each year the children are attending college within 4-5 years of high school graduation. Another is some parents use tuition at a community college for 2 years and then tuition at a SUNY school for two years.
This can be a more doable obligation on the parent’s part, allowing them to incorporate a fixed figure into their own financial planning.
When it comes to college expenses as a whole, even with their own contributions, parents may need to guide their children to apply to reasonably priced schools to avoid large student (or parent) debt upon graduation.
Funding the Obligation to Pay for a Child’s College Expenses
It’s important to let each parent fund his/her obligation in the manner they choose. Frequent options include:
- A 529 education plan (described below).
- Put money aside weekly or monthly.
- Obtain a loan in the name of the parent (not a student loan).
Other things to consider:
- It is generally not useful to require a parent to use a certain savings program. Each parent is allowed to figure out how to meet his or her obligation amount defined in the separation agreement.
- A potential positive outcome of this planning may be that the child(ren) can get a debt-free, high-quality college education, even if they have to live at home and commute.
- Most separation agreements have obligation for education for a maximum of a four-year degree bachelor’s degree. The child who wants to pursue a master’s or doctorate will have to look for other ways to pay those expenses.
- Sometimes parents specify that payments will be made only if the child is enrolled full-time and achieves a certain grade point average.
Using 529 Plans or Other Savings Options for College
A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996.
529 Plans can be used to meet costs of qualified colleges nationwide. In most 529 Plans, your choice of school is not affected by the state your 529 savings plan is from. You can be a CA resident, invest in a VT plan and send your student to college in NC. You need to make sure the chosen college is “eligible” for section 529 by looking it up in this Federal School Code Lookup search program. For more details on 529 Programs, please see the links in the Resources section below.
Sometimes parents have already accumulated savings for college in a 529 Plan before the divorce. Let’s use the example of $20,000 having been saved. There are important considerations regarding these savings.
- Most people “freeze” the 529 Plan at the point of divorce so it is very clear what has been accumulated “maritally.”
- Usually only one parent is on the “marital” 529 Plan. It’s very important to make sure the other parent is named as beneficiary on the “marital” 529 plan. Also, a power of attorney (POA) form should be created to define who has the authority to manage the “marital” 529 funds in case the parent who owns the 529 Plan cannot make decisions.
- If a parent want to continue using a 529 Plan after the divorce, he or she should start a new plan so that the funds in his/her plan clearly come from outside the marriage.
- Will the “marital” 529 Plan funds be used to pay expenses above the tuition like room and board? Does it reduce either or both parent’s college funding obligations described in the separation agreement? The agreement should be very clear about these items.
- Documentation of the balance of the “marital” 529 Plan should be made available upon request by the parent managing the funds after the divorce.
- The “marital” 529 Plan funds should only be used for the children of the marriage.
- If other persons (like grandparents) create savings or an inheritance for the children, those funds can be used to reduce the related parent’s obligation.
Child Support and College Funding
The NY State guidelines state that child support continues until the child reaches age 21, unless a child is emancipated. Emancipation refers to events in a child’s life that occur before age 21 and eliminate the need for either parent to provide child support. The primary events are joining the military, marrying, or not going on to higher education after high school and being self-sufficient.
How child support is paid or what adjustment to child support may be needed because of college is a very important mediated conversation. The concept behind continuing child support is that the child’s home still needs to be maintained while the child is at school. Certain child support-related expenses are still need to be paid such as clothes, allowance, car insurance, cell phone, and the like.
- Sometimes a parent is either obligated by the separation agreement to pay or voluntarily pays for room and board (in addition to tuition). If so, a conversation is needed regarding reducing child support to avoid “double dipping” or paying for two residences.
- Parents can create their own agreement regarding how to pay for the non-tuition college expenses. Sometimes when the child goes to college, the parents create a new payment plan. But, there is often a child still at home still requiring child support.
Additional Points on Child Support
- Many parents continue child support until the child completes college within four years of high school graduation, regardless of the child’s age. For instance, if a child turns 21 in November of his 4th year of college, child support for him would continue until his college graduation in May or June of the following year.
- If there are two children, child support is calculated at 17% of adjusted income for one child and 25% for two children. If there is an adjustment made when the oldest goes to college, the adjustment would only fall in the 8% between 17% and 25%. When the second child goes to college, there might be a much larger adjustment.
- One adjustment frequently discussed is to determine how much time, in a year, a child might be home. Let’s say a child is home 4 out of 12 months.Let’s say that the difference in the amount of child support between 17% and 25% (one or two children) is $5,000.The child is not home 8 of 12 months. Then the child support reduction might be 8/12 (or 75%) of $5,000, which equals $3,750.
When discussing this, the parents should keep in mind that the savings on variable house expenses, such as utilities and food, are minimal when one child is not home. The fixed expenses such as mortgage and insurance don’t change because the child is absent.
Funding College – Financial Aid for College
Most high schools present a college financial aid presentation every fall. It is very useful to attend this presentation when your child is a sophomore rather than wait until he is a senior. Preparation for financial aid takes considerable time and must be done well in advance of applying for a loan.
If you are interested in any form of need-based financial aid, completing the Free Application for Federal Student Aid (FAFSA) is essential to determine your eligibility. Please read my post, “Divorce and College Financial Aid,” which addresses financial aid and FAFSA in more detail.
If you sign, or co-sign with your child, a parent loan, your credit will be affected if the loan is not repaid for any reason. It is prudent to have a life insurance policy on the child you have co-signed with. In the unlikely event something happens to your child, the debt will be paid and not default to the co-signer.
Planning for Paying for College in Divorce Is Essential
When the student’s parents are going through a divorce or have been divorced, the financial aid process, rules, and paperwork can be harder to interpret and navigate.
Who pays for college, how much, and for how long should be talked about as specifically as possible and spelled out in the divorce settlement agreement.
Resources for Paying for College
- What Is a 529 Plan?
- New York State’s 529 college Savings Program
- Free Application for Federal Student Aid (FAFSA)
- “Divorce and College Financial Aid“
Photo credit: © Can Stock Photo / zimmytws
This blog and its materials have been prepared by BJ Mediation Services for informational purposes only and are not intended to be, are not, and should not be regarded as, legal or financial advice. Internet subscribers and online readers should not act upon this information without seeking professional counsel.